Buy-to-let lenders toughen up their rules as embattled landlords prepare to be stripped of tax reliefs

Buy-to-let lenders have begun a crackdown on lending to landlords ahead of a range of tax and regulatory changes due next year.

From April 2017, embattled landlords will start to lose tax reliefs on their mortgage interest, leading to considerably lower profits for many.

Meanwhile the Bank of England will force lenders to impose tougher lending rules from 1 January. Buy-to-let lenders are already preparing for these changes, making it harder for landlords to qualify for a mortgage.

The Bank of England is forcing lenders to impose tougher lending rules from 1 January

They are increasing the amount of rental income landlords need to have to cover their mortgage payments. They are also demanding that landlords show they could still cover their mortgage amply if interest rates go up in the future.

TMW, one of the two largest buy-to-let lenders in the UK and part of Nationwide, already raised its rental income ratio from 125 per cent to 145 per cent earlier this year in anticipation of the rule changes.

Now it has raised the 'stress test' interest rate - the hypothetical rate at which landlords must show they could still cover the mortgage with their rental income if rates rose - from 4.99 per cent to 5.5 per cent for some loans.

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This means that the rental income will have to cover the mortgage payments by 145 per cent at the current mortgage rate and at 2 per cent higher than that rate, or 5.5 per cent, whichever is the higher.

From Monday 19 December, the tougher rules will apply on all applications unless the product term is fixed for five or more years or the application is a remortgage of up to 65 per cent loan-to-value and is for the same amount as the existing mortgage.

In these scenarios, the current stress rate of 4.99 per cent will continue to apply while for applications where overall buy-to-let lending with the Nationwide group exceeds £1million, a stress rate of 5.99 per cent will apply.

TMW is not the only lender making changes - Leeds Building Society is also increasing its rental income ratio requirements from 125 per cent to 140 per cent from the beginning of January and stressing this against a rate of 5.5 per cent for new buy-to-let mortgages and remortgages where additional capital is raised.

Bank of England governor Mark Carney has warned buy-to-let lenders over concerns lending to landlords could pose a systemic risk to the economy

For straightforward remortgages a stress rate of 5 per cent will be applied.

However, in a bid to make the tougher stance slightly more palatable, Leeds has ditched its previous requirement that landlords have a minimum income of £25,000 or £40,000 for joint applicants.

Virgin Money has also brought in changes. Its rental income ratio has risen from 125 per cent to 145 per cent although its stress rate has come down from 5.74 per cent to 5.5 per cent. The challenger bank has also revealed it will stop lending to landlords with more than 11 mortgaged properties in their portfolio.

Coventry Building Society meanwhile has also confirmed that from 15 December, it will raise the bar for landlords, hiking its stress rate to 5.5 per cent and its rental income ratio to 140 per cent although five-year fixed rates will continue to be stressed at 5 per cent.

Further changes are expected during the course of 2017 with landlords who have a portfolio of four or more buy-to-lets subjected to even tougher scrutiny by lenders after 30 September.

From this date the Bank of England is making it mandatory for lenders to assess financial details on every single mortgaged buy-to-let in these landlords' portfolios - even where the mortgages are held with different lenders.